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This doesn't happen with regular cash because banks usually take this loss and pass it onto their customers as fees. The exchanges that have closed operate too

This doesn't happen with regular cash because banks usually take this loss and pass it onto their customers as fees. The exchanges that have closed operate too unintelligently to be able to survive an attack. Almost 900 bitcoins in hot storage? That's almost 500,000 dollars being left in the open. It's like a bank keeping 500,000 dollars in a vault with no lock, no security, and no laws... With p2p coins, hot storage should be just enough for the day's operations and no more. Overdrew for the day? Make the customers wait, it's worth it for the safety.

iancarroll 13y ago
Yet nobody will pay fees for a bitcoin wallet.
exelius 13y ago
This doesn't happen with regular cash because banks have the scale to absorb it and pass it on to their customers. Bitcoin doesn't yet; and even if it did, there's no real way to restrict it. Just as an example, Bank of America has over $2 trillion in deposits. If any minimally significant portion of that amount goes missing, it's pretty easy to track just due to scale. There are policies in place that ensure any transaction above a certain size gets looked at. If there are too many large transactions in a day, that gets investigated too. In exchange for having these safeguards in place, the government is willing to guarantee these deposits in the form of FDIC insurance. Banking regulation is a good thing, especially when you're talking about an anonymous currency where transactions can't be rolled back. EDIT: Just wanted to add that while Bitcoin itself probably will never be a globally significant currency, some form of cryptocurrency is likely to obtain relevance. But some people are going to get burned along the way, and these are the risks that you need to accept if you want to dabble in what amounts to unregulated banking. The regulations exist for a reason.
- mathattack 13y ago
  What advantage will another currency have over Bitcoin, that will trump it's lack of branding? If Bitcoin (with first mover advantage and network effects) fails, wouldn't it be twice as hard for the next to start from scratch? My uninformed intuition tells me it's more likely that there will be a Gold and a Silver - one better, one worse, each used for different things.
  - exelius 13y ago
    Bitcoin's complete lack of centralized trust and inherent deflation seem like they may become big problems over the long run. I get that the peer-to-peer nature of it is considered a strong point by many -- but it also exposes users to fraud with little recourse. It's basically like carrying cash: you can walk around with $10,000 in your pocket, but if someone robs you and gets away, you're out $10,000. If someone steals your credit card, the bank has fraud protection measures in place that limit their losses, and they often can roll back transactions. Unless you impose a similarly regulated structure on top of Bitcoin (where banks are super-secure and won't transfer large amounts of BTC without an auditable authorization chain so people become personally liable for any fraud that may occur) you're not going to be able to solve these problems. Deflation is a bigger issue, in my mind. The algorithmic scaling of Bitcoin basically ensures that it will either not be very much in demand at all, or it will become increasingly scarce relative to demand over time. This creates an incentive to buy and hold Bitcoin as its value has tended to go up over time. However, most of the modern economy is based on the assumption that money today is worth slightly more than money tomorrow. This creates pressure to spend or invest, rather than hold onto currency for any reason other than liquidity. If Bitcoin remains popular, it won't be because of its virtues as a currency.
stephenr 13y ago
As I understand it, banks are insured against theft by central banks/governments in most countries. Plus there is that whole thing of regulations about bank responsibilities.
- bitJericho 13y ago
  That's when the bank goes out of business. Banks are hacked all the time the government does not (usually) bail them out.
  - danielweber 13y ago
    Yeah, normal robbery is handled with normal insurance. The police are called, a police report is made, forensic accountants determine how much got swiped, the insurance company writes a check. (I am not a banker.)
  - stephenr 13y ago
    Ah you are correct, FDIC/CDIC/etc do not in fact provide theft insurance, but you help with the point I was making though - Banks have been robbed for years, and individuals don't lose money when that happens (how could they? your deposit doesn't sit as cash somewhere waiting for you to claim it) According to the FDIC, for most banks theft is covered by the banks insurance policy (they refer to it as a "banker's blanket bond") which also covers loss (of money) by fire, flood, and even things like embezzlement etc. So until BTC exchanges/etc actually have insurance policies (literal policies, not figurative "insurance policies") the risk seems higher. Also worth considering - I remember reading about a bit coin site that uses a Safe Deposit Box to store the majority of its holding "offline", but safe deposit boxes aren't insured by either FDIC (even in the event of bank failure) or by the bank, so if their safe deposit box is breached (either as a theft or just damage) there is no safety net.
slaxman 13y ago
Bitcoin n00b here. What exactly is a hot wallet/storage?
- bitJericho 13y ago
  Hot storage is a wallet that is accessible online, eg, n wallet used by the "bank" to transfer coins from their own account to a customer that wants to be paid out. A cold wallet is one where the keys are kept offline and not plugged into anything, eg, a printout, or a USB key.
  - slaxman 13y ago
    So, is keeping a majority of bitcoins (>98%) bitcoins in cold storage the only way to keep them safe?
    - infinii 13y ago
      If they secured their servers (from hacking), they could theoretically leave everything in hot storage (although it's not necessary for normal operations as others have stated).
- patio11 13y ago
  In the real financial world, matching and settlement occur asynchronously from each other, on different systems. Matching is "X tried to buy Y at Z, Q tried to sell Y at Z, their orders match." Settlement is physically delivering Y to X while physically debiting Z from Q. Bitcoin developers haven't quite cottoned onto the wisdom of separating these functions architecturally. (One of many advantages is "If your matching system is compromised, you shut it down and investigate, but no money actually leaves. The settlement system is in your back office and much more protected than the matching system, because the settlement system doesn't have to talk to customers directly.") Bitcoin developers instead have developed a security pattern called hot wallet/cold wallet, where BTC which are available to the system are "hot" and BTC which are not available to the system are "cold." The idea is that, in any given day, you might only require 2% or so of your company's total reserves to go in or out. You keep the private keys to, say, 5% of it on the live system. That's your hot wallet. You keep the private keys to the remaining 95% somewhere else. That's your cold wallet. Even if your live system is rooted, you should not (the thinking goes) lose the private keys to the cold wallet. The Bitcoin community widely believes that this pattern is sufficient to prevent events like the recent Mt. Gox debacle, where the system was compromised and both the hot wallet and cold wallet were drained.

iancarroll 13y ago

Yet nobody will pay fees for a bitcoin wallet.

exelius 13y ago

This doesn't happen with regular cash because banks have the scale to absorb it and pass it on to their customers. Bitcoin doesn't yet; and even if it did, there's no real way to restrict it. Just as an example, Bank of America has over $2 trillion in deposits. If any minimally significant portion of that amount goes missing, it's pretty easy to track just due to scale. There are policies in place that ensure any transaction above a certain size gets looked at. If there are too many large transactions in a day, that gets investigated too. In exchange for having these safeguards in place, the government is willing to guarantee these deposits in the form of FDIC insurance. Banking regulation is a good thing, especially when you're talking about an anonymous currency where transactions can't be rolled back. EDIT: Just wanted to add that while Bitcoin itself probably will never be a globally significant currency, some form of cryptocurrency is likely to obtain relevance. But some people are going to get burned along the way, and these are the risks that you need to accept if you want to dabble in what amounts to unregulated banking. The regulations exist for a reason.

mathattack 13y ago
What advantage will another currency have over Bitcoin, that will trump it's lack of branding? If Bitcoin (with first mover advantage and network effects) fails, wouldn't it be twice as hard for the next to start from scratch? My uninformed intuition tells me it's more likely that there will be a Gold and a Silver - one better, one worse, each used for different things.
- exelius 13y ago
  Bitcoin's complete lack of centralized trust and inherent deflation seem like they may become big problems over the long run. I get that the peer-to-peer nature of it is considered a strong point by many -- but it also exposes users to fraud with little recourse. It's basically like carrying cash: you can walk around with $10,000 in your pocket, but if someone robs you and gets away, you're out $10,000. If someone steals your credit card, the bank has fraud protection measures in place that limit their losses, and they often can roll back transactions. Unless you impose a similarly regulated structure on top of Bitcoin (where banks are super-secure and won't transfer large amounts of BTC without an auditable authorization chain so people become personally liable for any fraud that may occur) you're not going to be able to solve these problems. Deflation is a bigger issue, in my mind. The algorithmic scaling of Bitcoin basically ensures that it will either not be very much in demand at all, or it will become increasingly scarce relative to demand over time. This creates an incentive to buy and hold Bitcoin as its value has tended to go up over time. However, most of the modern economy is based on the assumption that money today is worth slightly more than money tomorrow. This creates pressure to spend or invest, rather than hold onto currency for any reason other than liquidity. If Bitcoin remains popular, it won't be because of its virtues as a currency.

stephenr 13y ago

As I understand it, banks are insured against theft by central banks/governments in most countries. Plus there is that whole thing of regulations about bank responsibilities.

bitJericho 13y ago
That's when the bank goes out of business. Banks are hacked all the time the government does not (usually) bail them out.
- danielweber 13y ago
  Yeah, normal robbery is handled with normal insurance. The police are called, a police report is made, forensic accountants determine how much got swiped, the insurance company writes a check. (I am not a banker.)
- stephenr 13y ago
  Ah you are correct, FDIC/CDIC/etc do not in fact provide theft insurance, but you help with the point I was making though - Banks have been robbed for years, and individuals don't lose money when that happens (how could they? your deposit doesn't sit as cash somewhere waiting for you to claim it) According to the FDIC, for most banks theft is covered by the banks insurance policy (they refer to it as a "banker's blanket bond") which also covers loss (of money) by fire, flood, and even things like embezzlement etc. So until BTC exchanges/etc actually have insurance policies (literal policies, not figurative "insurance policies") the risk seems higher. Also worth considering - I remember reading about a bit coin site that uses a Safe Deposit Box to store the majority of its holding "offline", but safe deposit boxes aren't insured by either FDIC (even in the event of bank failure) or by the bank, so if their safe deposit box is breached (either as a theft or just damage) there is no safety net.

slaxman 13y ago

Bitcoin n00b here. What exactly is a hot wallet/storage?

bitJericho 13y ago
Hot storage is a wallet that is accessible online, eg, n wallet used by the "bank" to transfer coins from their own account to a customer that wants to be paid out. A cold wallet is one where the keys are kept offline and not plugged into anything, eg, a printout, or a USB key.
- slaxman 13y ago
  So, is keeping a majority of bitcoins (>98%) bitcoins in cold storage the only way to keep them safe?
  - infinii 13y ago
    If they secured their servers (from hacking), they could theoretically leave everything in hot storage (although it's not necessary for normal operations as others have stated).
patio11 13y ago
In the real financial world, matching and settlement occur asynchronously from each other, on different systems. Matching is "X tried to buy Y at Z, Q tried to sell Y at Z, their orders match." Settlement is physically delivering Y to X while physically debiting Z from Q. Bitcoin developers haven't quite cottoned onto the wisdom of separating these functions architecturally. (One of many advantages is "If your matching system is compromised, you shut it down and investigate, but no money actually leaves. The settlement system is in your back office and much more protected than the matching system, because the settlement system doesn't have to talk to customers directly.") Bitcoin developers instead have developed a security pattern called hot wallet/cold wallet, where BTC which are available to the system are "hot" and BTC which are not available to the system are "cold." The idea is that, in any given day, you might only require 2% or so of your company's total reserves to go in or out. You keep the private keys to, say, 5% of it on the live system. That's your hot wallet. You keep the private keys to the remaining 95% somewhere else. That's your cold wallet. Even if your live system is rooted, you should not (the thinking goes) lose the private keys to the cold wallet. The Bitcoin community widely believes that this pattern is sufficient to prevent events like the recent Mt. Gox debacle, where the system was compromised and both the hot wallet and cold wallet were drained.